A cost- estimating system must not only accurately calculate your costs but it also must include all of your costs. Remember, every legitimate cost that you have in your business should be passed on to your customers with an appropriate net profit margin added to it. For each and every cost that you incur, ask yourself, “Where is this cost included in my pricing system and getting passed on to my customer?”
Whenever I teach an estimating seminar or workshop, I start by explaining a very simple pricing scenario. I show the audience how to calculate the hourly rate for an irrigation service technician using my MS Excel pricing worksheet. You can adapt this example to just about any service that you provide. Here it is.
Pricing scenario for an irrigation technician
The setup: See the MS Excel Scenario 1
Our service technician is paid an hourly rate of $25 and works an average of 45 man-hours per week. We add a 10% risk factor to account for weather issues, equipment breakdowns and miscellaneous unknowns. These two items increase our crew-average wage to $28.89. We’ll add a 25% labor burden to account for benefits (Federal Insurance Contributions Act, Federal Unemployment Tax Act, State Unemployment Tax Act) costs, paid holidays, vacations, PTO, workers’ compensation and liability insurance, and so forth. General and administrative (G&A) overhead cost is $18 per man-hour (we divide the G&A overhead costs by the billable man-hours in this division).
Phase I Production Costs (on-site or curb-time costs): There are no material, equipment or subcontractor costs but we have seven man-hours that the technician will spend on job sites (7 x $28.89 = $202.23).
Phase II General Condition costs (off-site costs): These are material, labor, equipment and subcontractor costs that generally happen off-site. Two of the technician’s daily man-hours occur off-site for drive time, load/unload time, etc. (2 x $28.89 = $57.78). We include the service van at a cost per hour (CPH) of $10 for eight hours per day (8 x 10 = $80).
Phase III Margins and Markups: In this phase, we add sales tax to materials (if it applies) and labor burden to field labor. All of these Phase I, II and III costs add up to $405, or our total direct costs (TDC).
Next, we calculate our G&A overhead costs by multiplying the 9 man-hours by the G&A overhead cost per man-hour (9 x $18 = $162). This gives us our break-even point (BEP).
Finally, we add the desired 20% net profit margin (NPM) to the BEP. This gives us a daily revenue labor goal for this technician of $709. The portal-to-portal man-hour rate is $78.75. I’d round this up to $80 per man-hour.
Our pricing system includes all of the costs related to this technician and calculates two very important rates. First is the hourly rate of $78.75. As important as this rate is, it is even more important that the technician bills a minimum of $709 per day for labor. Since all G&A overhead costs are included in the labor rate, any margin added to materials is net profit.
If any of our costs change, we adjust our pricing model accordingly. For instance, if the van CPH, due to fuel costs, increases to $12 per hour, the technician gets a $5 per man-hour raise; the labor burden increases to 30%; and the technician works an average of fifty man-hours per week, the updated man-hour rate increases to $94.33 and $849 per day. (See the MS Excel Worksheet Scenario 2)
Too many popular green industry software programs aren’t granular enough to accommodate the cost volatility of the current marketplace. They often utilize a labor rate ($45, $50, 65 per man-hour, etc.) that can’t be broken down into the many components that it should include.
The simple but comprehensive MS Excel worksheet that I use to price labor rates addresses those shortcomings. If labor costs change, you adjust them in the labor section of the worksheet. If fuel costs increase, you adjust the cost per hour for trucks and equipment accordingly in the truck and equipment portion of the worksheet. If factors change, you simply make the adjustment in the worksheet and your pricing accurately and automatically adjusts. If you desire more or less net profit, you simply change the net profit margin field.